It is relatively easy to understand how important asset protection planning for Nevada residents can be. Most people want to make sure their assets are protected, including real estate, investments, business interests, and even personal property. Just consider the costs of malpractice, business (E&O), and other forms of liability insurance, which are rapidly increasing. It is certainly important to be preemptive in protecting your assets from potential creditors, whether that is through an insurance policy, homestead, or other asset protection plan. What may be even more important is understanding the most common mistakes in asset protection that Nevada residents should avoid.
One common mistake that many people make is assuming that there is something wrong with creating a plan to protect your assets. Many people feel like they are "hiding assets" or irresponsibly "sheltering" their estate from the reach of creditors. That simply is not true. We are all free to structure our assets in the most advantageous way available, as long as we do so properly and in accordance with the law. The only time that the issue of fraud is raised is when the purpose of an asset protection plan is solely to hinder, delay, or defraud creditors from collecting valid debts. The key is to create your asset protection plan before the creditors' claims arise.
Plan in advance! Another mistake that some individuals make is not taking action to protect their assets until after a problem has arisen. If you've already been sued (or if you know you're about to be sued), it's likely too late to effectively create a plan. The best and most effective asset protection planning is accomplished long before any creditor claims arise. The best time to start an asset protection plan is when you are solvent and not currently facing any threats from existing creditors. The purpose of asset protection planning is to protect from potential future creditors. The sooner you start planning, the more options will be available to you.
One aspect of asset protection planning that is difficult for most people is making a proper determination of who is likely to be a potential creditor. Those who are able to make this determination are better able to make an effective asset protection plan. It is easier to plan when you know exactly what you are planning for. In other words, if you can implement a strategy to protect against certain claims you can more easily limit your exposure to that liability. Some common ways to avoid liability, especially for business owners, include:
You cannot rely on an asset protection plan someone else used. Friends may be well-intentioned, but one size definitely does not fit all when it comes to asset protection planning. Not every protection strategy will work in every case. Any estate planning attorney will tell you – an asset protection plan needs to be developed on a case by case basis. Some people can effectively create an asset protection plan by taking advantage of legal protections under homestead, ERISA, business, and other federal and local laws; still others may need a more complex asset protection trust to deal with potential creditors. Individual needs must be carefully considered when choosing your planning options, so don't use a boilerplate plan and hope that you will be protected. Most likely, you will not.
Many clients have the same misconception, that any type of trust can provide asset protection. That is not the case. First, revocable living trusts do not provide protection for individuals who created the trust simply for that purpose. It is important to remember that, in most states, when the person who has funded the trust is a potential beneficiary, then the assets may not be protected from creditors. However, a properly drafted revocable living trust may be able to add asset protection for surviving spouses and/or other beneficiaries. An irrevocable trust can only protect property that is transferred to the trust as long as there is no evidence of a fraudulent conveyance, and a statutory period of time has passed before a creditor claim arises. Foreign offshore trust accounts have come under scrutiny in United States Courts, recently. Very special care must be given when implementing an asset protection plan that includes an offshore account.
A part of asset protection planning necessarily includes consideration of possible inheritances from relatives, a factor that is often overlooked. Those inheritances must be structured, as well, in order to provide maximum flexibility, as well as, protection against creditors and divorce. An estate plan is a way for you to prepare yourself and your family for what happens after you pass away. An appropriate estate plan can also give you an opportunity to plan for unexpected incapacity. Regardless of how few assets you may have, planning for your family's future is a necessity for everyone.
If you have questions regarding mistakes in asset protection, or any other asset protection planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.
Estate planning for high net worth families is extraordinarily important given the realities of the federal estate tax and any damage that could be done via litigation. In addition to these protections you also have the ability to reach out and support nonprofit entities that you believe in while gaining tax advantages in the process.
This may seem self-evident to anyone who has the financial savvy to have accumulated a significant store of wealth. You must, however, be diligent because constant adjustments may be necessary as things change.
There are changes that take place in your own life such as a divorce, getting remarried, and watching family members depart while others join the family. Of course very significant changes in your financial standing are relevant as well.
In addition to these things that can take place in the life of an individual there are also very important changes that reverberate throughout society as a whole. For example, in 2013 the estate tax exclusion is going down to $1 million while the rate rises to as much as 55%. These parameters will also apply to the gift tax and the generation-skipping transfer tax.
The portability of the estate tax exclusion between spouses ends in 2013 as well. Besides the increased exposure to estate taxes, taxes on dividends and capital gains will be going up if the currently existing laws are not changed in the very near future.
To keep wealth intact you must be ready to adjust along the way, so take advantage of an annual review with your estate planning attorney and stay on top of your financial health.
Each estate plan is as individual as the person who creates the plan. Having said that, one of the most common components to an estate plan is life insurance. Whether or not you should include life insurance as part of your estate plan will depend on a number of factors; however, there are some things you should take into account when making the decision.
Your age and health. Life insurance is less expensive to purchase when you are younger and healthy, meaning you should be able to lock in the best rates. This is also when most people need life insurance for wealth and income replacement -- before they have other estate assets that can be passed down in the event of death.
Know what kind you are buying. Life insurance falls into two basic types -- term and insurance with cash value such as whole life or universal life. Term insurance only provides a death benefit while insurance with a cash value component potentially earns cash value, as the term implies.
Know your objective. If you only want to provide a financial safety net to your family, sticking with term insurance is likely your best bet. Talk to a financial advisor if you are considering whole life insurance. It can be a complicated investment strategy, but there are benefits that are not available to term policy holders.
Decide how much you need. This can change over the years. If you are young and single, you may only need enough to cover debts and your funeral. As you age, you should factor in what it will cost to raise your children if you die before they reach the level of maturity when they will be able to fend for themselves.
Shop around. Just as with other types of insurance policies the policy rates can vary widely. Take your time and compare rates before you commit. You should also be certain you are dealing with a company that is secure, so look at their rating with AM Best or Standard and Poors.
Know when to terminate or convert. Life insurance is rarely the best way to invest your money, but when it comes time to collect, your loved ones will find that you have provided well for them. Review your financial portfolio and your needs on a regular basis not only with your financial adviser, but your attorney, as well. You may find that you no longer need to include a life insurance policy for wealth or income replacement, but it could be useful in your estate plan as protection from estate taxes, expenses of administration, or other financial burdens of which you may not be aware.
When you are serious about making informed plans for the future you have to be aware of all of the options that are available to you and how to use them effectively. Depending on the resources that you have and what your legacy intentions are some of the instruments that would be useful are rather complex. So, unless you are in the field of financial planning or elder law you probably are not going to have a comprehensive understanding of the challenges that exist and the appropriate responses that are typically utilized by estate planning professionals.
This is why it is important to develop a good working relationship with a legacy planning attorney you can trust. He or she will gain an understanding of your wishes, evaluate your assets, and make the proper recommendations so that your legacy goals will eventually come to fruition.
One of the tools used that can provide tax savings as well as asset protection is the charitable remainder unitrust, which in estate planning circles is often shortened to the acronym CRUT. You create and fund the trust and name both a charitable and non-charitable beneficiary. The non-charitable beneficiary must receive annuity payments equal to between 5% and 50% of the fair market value of the trust annually, so most people are going to act as their own beneficiary. You could serve as the trustee as well.
At the end of the trust term, which can be upon your death if you choose to set up the trust in this manner, the charitable beneficiary assumes the remainder that is left in the trust. This remainder must equal at least 10% of the original fair market value of the CRUT.
Assets that are placed in the trust are no longer the personal property of the grantor so they are protected from creditors and claimants. From a tax perspective, the act of funding the trust reduces the value of your estate for estate tax purposes. And there are also capital gains tax advantages if you fund the trust with appreciated securities. In addition, you are entitled to a charitable deduction, the amount of which is determined by the application of IRS rules regarding charitable remainder unitrusts.
If you have an estate that will likely be subject to an estate tax at your death, make an appointment to meet with a legacy planning attorney to discuss a CRUT or other methods of reducing your taxable estate.
There were some big changes to the estate tax parameters included as part of the new legislation signed into law by the president on December 17th that is being called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The lead story from an estate planning perspective involved the rate of the tax and exclusion amount. Rather than the $1 million exclusion that was scheduled upon the expiration of the Bush tax cuts the exclusion is set at $5 million, and the rate of the tax is now 35% rather than the 55% that was on tap.
Is worthwhile to underscore the fact that this $5 million estate tax exclusion is for each individual. So if you are married you and your spouse have a total combined estate tax exclusion of $10 million to work with going forward in 2011 and 2012. If you think this through, a logical question will arise: If I passed away would my spouse get to use my $5 million exclusion as well as his or her own?
In estate planning circles this idea is defined as the issue of "portability." To many observers the estate tax in and of itself is unfair, so as you might expect most of the rules surrounding it tend to defy logic as well. Until the passage of this new tax relief legislation in December the answer to the above question was no, your surviving spouse could not use your estate tax exclusion if you were to pass away.
The reason why this is unfair is because the estate that is accumulated by a married couple is the product of the earnings and investments of each individual; this wealth represents the combined efforts of two people. When one of these two people passes away his or her contribution to the estate still exists and it is taxable, but his or her exclusion is not available to defray the tax liability.
As a result of the new law the estate tax exclusion is now portable, and your spouse can indeed use your $5 million exclusion if either of you were to pass away. Unfortunately, the new measure is only available for the next 22 months and dies with the sunset provision in 2013. Who knows what the law will look like at that time, but at least there is now a "toe in the door."